CFA Level I · CFA Level I Exam · Natural Resources
An investor holds a futures-based commodity position and wants to hedge unexpected inflation. Compared with equities, commodities are most likely a useful inflation hedge because:
Commodities are a potential inflation hedge because their prices are often a component of the general price level and tend to rise as inflation accelerates. They pay no coupons, and their correlation with bonds is not perfectly negative.
- Acommodity prices often rise with the general price level, since commodities are inputs to goodsCorrect
- Bcommodity futures pay fixed coupons indexed to inflation
- Ccommodity returns are perfectly negatively correlated with bonds
Explanation
Commodities are inputs to production, so their prices tend to rise when inflation accelerates, particularly when inflation is driven by demand or input costs. Futures pay no coupons, and correlation with bonds is not perfectly negative.
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